Authors

Andrew J. Goodwin

Christopher M. McHugh

Kansas City, Missouri, September 13, 2019

Recently, in connection with the rejection of many medical marijuana facility license applications as “incomplete,” the Missouri Department of Health and Senior Services (DHSS) issued a Sample Ownership Visual Representation, which is a fancy name for a sample organizational chart, “[f]or assistance with the Ownership Structure Form” included in DHSS’ standard marijuana facility application packet. The Sample is below:

Source: https://health.mo.gov/safety/medical-marijuana/pdf/sample-ownership-written-visual.pdf

The big problem with this Sample is it shows – as a state example of how a Missouri marijuana licensee should be organized – a corporation (GrowMo, Inc.) existing as the majority owner of the licensee, which is an organizational structure unequivocally barred by the plain language of Article 14 of the Missouri Constitution.

The Constitution is crystal clear on this point. All medical marijuana facility licenses “shall be held by entities that are majority owned by natural persons who have been citizens of the state of Missouri for at least one year prior to the application for such license.” There is no room for interpretation. In fact, there may be no term in the law less subject to interpretation than the term “natural person.” Black’s Law Dictionary, the universally recognized authority on legal terminology, defines natural person as, “A human being as distinguished from an artificial person [such as a corporation] created by law.”

You might wonder, what’s the big deal since the Sample chart also shows that the intermediary corporation is in turn owned by three natural persons who are all Missouri residents? In the end and from a certain perspective, all the GrowMo corporation in the Sample does is add one more layer between the licensee and three humans who own 100 percent of that middle layer. Is that really so bad?

The answer is a resounding YES, because whether you agree with the reasoning behind the natural person requirement, or you think it is silly, the requirement exists and is not optional. The authors would argue the natural person requirement in the Constitution helps protect against out-of-state companies seizing control of Missouri’s fledgling medical marijuana industry without forcing the state to dig through copious corporate records to confirm identities. But even if the requirement was universally recognized as bad policy, it was still part of Amendment 2, which Missouri voters overwhelmingly approved, and is now enshrined in Missouri’s Constitution, the highest law of the land. So ignoring it results in a legal nightmare of sorts.

This is not a problem on the periphery or something that might be fixed later down the road. Majority ownership of medical marijuana licensees by natural persons is a core requirement under the Constitution. Even the emergency regulations enacted by DHSS acknowledge that majority ownership by natural persons is one of the “minimum standards for licenses.” The regulation on “Facility Evaluation Criteria” states, “[t]he minimum standards for licenses and certifications can be met by providing all materials required by 19 CSR 30-95.040(2) in order to show, as applicable … [t]hat the entity is majority owned by natural persons who have been residents of Missouri for at least one (1) year.”

In other words, the natural person requirement is a must-have. Either an applicant meets the requirement or not. And if not, the applicant cannot have a license under Missouri law under any circumstances. Or to put it in strictly practical terms, any applicant following the Sample chart promulgated by DHSS will be SOL (sorry, out of luck) no matter how good the rest of its application might be.

Right now, litigation looks inevitable. Those unsuccessful applicants that follow DHSS’ Sample chart will claim (and rightfully so) they were misled. And those that do not will claim license spots were taken by other applicants who did and should be disqualified under the Constitution.

Ultimately, fallout could include a substantial number of additional licenses issued by DHSS in settlement, and/or a serious delay in the rollout of licenses in general.

If DHSS were to react quickly, retract its Sample Ownership Visual Representation and corresponding Sample Ownership Structure Form, and take steps to contain and fix the damage already done, including issuing clear guidance that direct majority ownership by natural persons is a minimum requirement for all medical marijuana licensees, that might help.

Drew Goodwin and Chris McHugh lead Seigfreid Bingham PC’s Cannabis Practice Group, which is dedicated to helping plant touching and plant adjacent businesses meet all the different legal challenges in the marijuana and hemp industries.